Sunday, June 6, 2010

The Importance of "Systems Thinking"

I came across a good article last night from the consulting firm, Booz & Company. It discusses what is known as systems thinking. The use of the word “systems” is a reference to a corporation as an organic whole, with many interconnected and interdependent functions. The article dovetails nicely into my own MBA research. I’ve been thinking a lot about this topic recently due to the BP oil spill, which one can very clearly identify as a breakdown in systems thinking, once you know what to look for.

What became very clear to me in my own research was that the bedrock of any successful, enduring corporate system consists of its leaders’ vision and values, which are expressed on a daily basis through the ethics and standards by which the company operates, through the delivery of its value proposition (i.e., the unique value it intends to deliver to its customers), and in how it operates internally in order to deliver that value proposition.

The vision of how a company will operate internally is communicated in the form of what I call an operating psychology, which consists of the organizational structures, methods, standards, processes, technologies, etc., that the organization will use to accomplish its work. The operating psychology needs to ensure that the leaders' values will be maintained through their employees' daily decisions and actions, and that such actions will produce the long-term vision the leaders have for the company.

A very basic issue to address, for example, when developing an operating psychology is to determine the level of quality the company wants to deliver as part of its value proposition, as quality has huge implications on the investments a company will make on plant and equipment, how much it will spend on training, the quality of people it will hire, whether it will use outsourcing, how much supervision it will provide to its staff, etc., etc.

Safety is another important issue. If a company's business activities are inherently risky, then the business needs to incorporate that degree of risk into its operating psychology. A company like BP, for example, would need to make sure that safety is prominently woven into the fabric of the company, and that safety would always take top priority over everything else. It must do so, as the consequences of doing otherwise can jeopardize the very existence of the company. To make safety the highest priority, the company would need to rigorously train its employees on good safety practices, and it would need to reward exhibitions of putting safety first, even when doing so results in short-term costs. Importantly, there can be no negative consequences on an employee who exercises appropriate caution -- no sideways glances, no withheld promotions, etc. Simply put, a commitment to safety must be a core value, and it must be continuously hammered into the psyche of the company.

Long story short, clearly communicating the operating psychology to the employees is every bit as important as disseminating the customer value proposition. This is where companies often fall down. After watching a 60 Minutes segment on the events leading to the BP disaster, it was obvious that there were both managerial failings on the rig and through every level in the company preceding those failings. It’s no coincidence that BP had the worst safety record in the industry even before this disaster. Clearly, a linkage between safety and the long-term sustainability of the corporation has not been firmly ingrained in BP's operating psychology. In other words, there are reasons why you get horribly short-sighted, costly and dangerous decisions from a mid-level manager on a rig in the middle of the Gulf. Those bad decisions result from breakdowns throughout the entire organization, all of which can be traced back to a failure in having a clear, enduring, and well communicated vision of how the company will operate and achieve success over the long haul.

The BP manager on the rig was worried about staying on schedule, as a slip in the schedule may have cost the company a few million dollars. Instead, by not keeping the long-term perspective in mind, he (and BP, through its bad management) created a disaster that may well bring down the entire company, and have costs on the people and ecosystems of this planet for decades to come. These same types of failings have brought down many corporations over the years, including many of the financial houses in the past couple of years. Hence, learning about these issues is really important, which is why I wanted to share these perspectives and the Booz article.

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About Me

Pat has nearly 30 years of experience as a financial executive. He is a CPA and holds an MBA from MIT's Sloan School of Management, where he was a Sloan Fellow. Pat's research interests include investments, financial markets, leadership and ethics, innovation and business sustainability, I.T. strategy, corporate governance, economics, politics, and globalization.